U.S. advisor names 2 Canadian stocks ‘best buys’

Analysts follow as many as 20 stocks, most of which are rated ‘buys’. Of those buys, an analyst has one or two special favourites seen as most suitable for new buying. Los Angeles-based portfolio manager Dan Neiman names a resource stock and a Canadian bank stock as his two favourites. Mr. Neiman clearly recognizes that the resource and financial sectors are the most dominant economic sectors in the Great White North.

Speculative buys like media-hyped IPOs and small energy and mining companies that appear to have struck gold (figuratively or literally) can explode with massive share price gains and captivate investors’ imagination. However, those rallies generally falter after the excitement dies.

Instead, portfolio manager Dan Neiman prefers a more conservative approach, buying established stocks with high dividend yields that can also attract covered call option premiums to protect against losses while benefiting from ongoing gains.

Based in Los Angeles, Mr. Neiman is an SEC-registered investment advisor and partner at Neiman Funds Management LLC. He runs the Neiman Large Cap Value Fund, started with his father, Harvey Neiman, in 2003, and has worked in investing since 2000.

Although he primarily deals with U.S. companies, two businesses north of the border have caught his eye: Bank of Montreal (TSX─BMO; NYSE─BMO) and Agrium Inc. (TSX─AGU; NYSE─AGU).

(Disclosure: Mr. Neiman personally owns shares of both Bank of Montreal and Agrium. In addition, many of the private client portfolios he manages hold shares of the two companies.)

Resource stock’s dividend leaps exponentially

For those unfamiliar with the company, Agrium is a fertilizer company serving the agriculture industry. Although the fertilizer industry has generally slumped lately, Mr. Neiman says Agrium has stayed ahead of peers.

For example, in the third quarter of 2015, Agrium’s nitrogen gross profits rose 69 per cent year-over-year, while potash gross profits went up US$40 million over the same period.

The company’s retail business declined year-over-year due to fluctuating foreign exchange rates as well as drought conditions. However, Mr. Neiman notes production was not a factor, meaning Agrium will have stock on hand when fertilizer prices go up again.

“Agrium recently completed a large expansion project that should see production costs decrease as output increases. The demand for potash remains strong,” he says.

Mr. Neiman also touts the company’s high and rising dividends over the last three years. In 2011, its quarterly dividend stood at just $0.06 a share. The following year, the dividend jumped to $0.50 a share for several quarters and hit $0.75 a share in 2014. The most recent dividend payout was $1.17 per share.

Even as share prices have risen, the dividend yield has similarly increased. Mr. Neiman says that for someone building a dividend portfolio, “Agrium deserves a long-term place.”

“There have been opportunistic times to buy and I’d say we’re still in that time frame,” he says.

Canadian bank stock manages wealth over lending

Mr. Neiman’s other pick, Bank of Montreal, is another high yield dividend stock with a history of increases, albeit more incremental ones; for example, the bank paid out $2.80 per share annually in 2010 and $3.04 in 2014.

The investment advisor explains that his company added the Bank of Montreal in 2011 in order to add exposure to financial stocks outside of the U.S., which performed poorly in 2011 and 2012 and have only rebounded somewhat since then.

At the time, the bank enjoyed a high dividend yield––more than five per cent––and higher than the U.S. institutions in the Neiman Large Cap Value Fund stable. Today, its yield is about 4.3 per cent.

Of course, Mr. Neiman has other reasons to like the stock. In particular, he says that the company has acted as more of a wealth management bank than a lending bank, leading the way on initiatives like “robo-advisors”.

“That service, provided to customers, will increase profits and grow market share as customers seek a lower-cost alternative to investing.” Customers answer a series of questions about their investing experience and knowledge, income, and so on in order to determine their tolerance for risk. Then, the robo-advisor suggests ETFs to buy.

Mr. Neiman praises the bank’s work in this field since it appeals to customers with low costs and no cost to trade. At the same time, the bank can extend its customer base by selling more services to casual investors. Best of all, precisely because they are casual, their money is “sticky” and will stay in the ETFs and other Bank of Montreal products they have purchased.

Finally, he says the bank trades at a favourable price compared to recent highs. “It’s a time to add it to your portfolio or if you own shares already, I’d be average-costing in at this level.”

 

Investor’s Digest of Canada, MPL Communications Inc.
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